Volaris beats third-quarter operating expectations; fuel assumptions are key to fourth-quarter guidance
Fares and ancillary revenue pushed Volaris’s quarterly revenue above 1 billion dollars for the first time, and operating profit turned positive. Fourth-quarter margin guidance was below expectations, but after Morgan Stanley adjusted its model to reflect the company’s higher fuel price assumption, the guidance was approximately 21% above its estimate.
Original source：Morgan StanleyFirst published on Unhidea：Original source date：
Key takeaway
Volaris’s third-quarter revenue and unit cost performance drove operating profit above expectations. Fourth-quarter guidance appears weak, but exceeds Morgan Stanley’s adjusted expectations when fuel price assumptions are aligned.
Where did third-quarter results outperform?
Volaris reported third-quarter revenue of 1.038 billion dollars, 5% above the Visible Alpha market consensus and 4% above Morgan Stanley’s forecast. Earnings before interest and tax (EBIT) were 34 million dollars, versus losses of 25 million and 10 million dollars previously forecast by the consensus and the bank, respectively.
Earnings before interest, tax, depreciation, amortization and rent (EBITDAR) were 263 million dollars, above the market consensus of 208 million dollars and the bank’s forecast of 217 million dollars. The margin was 25.3%, also above the company’s earlier guidance of approximately 22%.
The company still recorded a net loss of 26 million dollars, but that narrowed by nearly 80% from 127 million dollars in the second quarter. Its diluted loss per ADS was 0.23 dollars, also better than the market consensus loss of 0.62 dollars.
How did revenue growth translate into improved profitability?
Stronger fares and growth in ancillary revenue drove total revenue per available seat mile (TRASM) to approximately 10.3 cents, above the company’s guidance of approximately 9.94 cents and Morgan Stanley’s expectation of approximately 10.09 cents. The metric measures revenue generated per unit of capacity.
Capacity, measured in available seat miles (ASM), grew 11.1% year over year, and the load factor reached 85.7%, above 84.4% a year earlier. The company said demand absorbed the added capacity, while cross-border route expansion and capacity allocation also supported performance.
Unit cost excluding fuel was approximately 6.23 cents, slightly below the company’s guidance of 6.35 cents. Morgan Stanley said higher-than-expected revenue and lower-than-expected cash operating expenses were the main reasons for the earnings beat, partly offsetting weaker financial results and a lower tax benefit.
Why does fourth-quarter guidance appear weak?
The company expects fourth-quarter capacity to grow approximately 4% year over year, broadly in line with market consensus and above Morgan Stanley’s earlier forecast of 0.9%. TRASM guidance of approximately 10.9 cents is also above the consensus of 10.29 cents and the bank’s forecast of 10.39 cents.
However, the company expects an EBITDAR margin of approximately 20%, below the market consensus of 22.7% and the bank’s forecast of 23.6%. Combining the capacity, unit revenue and margin guidance, Morgan Stanley calculated fourth-quarter EBITDAR approximately 7% below consensus and 8% below its original forecast.
An important source of the difference is the fuel assumption: the company used 4.40 dollars per gallon, while Morgan Stanley’s original model used 3.77 dollars. Unit cost guidance excluding fuel was 6.50 cents, broadly in line with the bank’s expectation of approximately 6.4 cents.
How does the assessment change when fuel prices are aligned?
After putting the company’s higher fuel price into its model, Morgan Stanley calculated a fourth-quarter EBITDAR margin of 18.0%, below the company’s guidance of approximately 20%. On comparable fuel assumptions, the EBITDAR implied by the company’s guidance is approximately 21% above the bank’s lowered forecast.
Higher fuel prices had also affected the third quarter: the company said fuel costs were higher than expected, but liquidity at quarter-end remained at 823 million dollars, broadly unchanged from the end of the second quarter.
